Question

Based on the recent COVID19 pandemic, discuss the followings:

1. How does this pandemic affect economic growth?

2. Propose and discuss at least 3 actions that you think the government should take in order to reduce the negative impact of this pandemic on economic activities.

Answer 1

1. The Impact of COVID-19

While experts can estimate what the economic fallout from a pandemic such as the coronavirus will be, the precise impact will vary based on how many people are affected, how severely it hits, and which societal interventions are necessary to contain its spread.

With many workers and potential shoppers still sequestered, COVID-19 is proving to have a momentous impact on the global economy, as well as that of the United States. In the U.S., for example, retail sales dropped by 8.7% in April, the greatest monthly drop since the government began collecting data.7 On top of that, data from the Federal Reserve shows the worst dip in manufacturing output since the 1940s.8

Of course, that sudden drop in demand is having a disastrous effect on employment. In just the past four weeks, nearly 22 million Americans have filed for jobless benefits, shattering earlier records.9

Those economic shock-waves are being felt from Beijing to Madrid, creating a drag on the world economy that hasn't been seen for decades. The IMF recently announced its forecast for a 3% drop in global output in 2020, which would be the worst slide in recent memory. The organization envisions a muted recovery next year, with GDP growth of 5.8% worldwide.2

How long the pain will last remains an open question A century ago, the economic toll from the Spanish Flu was not particularly long-lasting. However, no one can say for certain whether that will be the case this time around. Certainly, the more effective governments in the U.S. and abroad are in facilitating medical care and reducing the rate of transmission, the more muted the economic impact will be.

2. How can Government Intervention Help?

In an ideal scenario, legislatures and central banks would use the power of the purse to help mitigate an economic crisis. In March 2020, U.S. lawmakers agreed on the passage of a $2 trillion stimulus bill called the CARES (Coronavirus Aid, Relief, and Economic Security) Act to blunt the impact of an economic downturn set in motion by the global coronavirus pandemic. On March 27, President Trump signed the bill into law. But those measures may prove less effective during a pandemic.

For example, efforts to open up the Treasury and send money directly to households might help individuals who have lost their job or seen their working hours reduced. But some experts argue that the impact is muted if many of the individuals receiving the funds can’t spend it—after all, many shops and restaurants are closed.

And interest rate cuts, intended to boost liquidity at a time when money is tight, may lose some of their potency when rates are already conspicuously low. The Fed slashed a key rate to zero in March, giving it precious little room to maneuver. “More interest-rate cuts into deep-red territory might help stock markets, but they also could trigger a run on cash,” wrote Hans-Werner Sinn, president of the Ifo Institute for Economic Research, in The Guardian this week.

Those aren't the only devices that governments have in their toolkit, however. They can, for example, activate short-term financing mechanisms that help businesses stay afloat and retain workers during the healthcare crisis. And they can bolster unemployment insurance and provide other safety nets that keep the most vulnerable residents from losing their homes or going hungry.

Most important, perhaps, government leaders can help ensure that hospitals get the vital resources they need to treat patients and protect doctors and nurses. They can also work with the private sector to ensure that testing is readily available, something that has to date hampered efforts to contain the coronavirus in U.S. Indeed, some experts believe the best economic medicine that the public sector can provide is a quick resolution to the underlying health threat. “Anything that slows the rate of spread of the virus is the best kind of stimulus,” Austan Goolsbee, the former chair of the Council of Economic Advisers, told NPR this month.